Reading the Fine Print of Loan Terms
Here are some of the most commonly used terms in real estate financing:
Acceleration clause--Provision in a trust deed or mortgage by which the lender can require that the entire balance be immediately due and payable if a specific event occurs, such as the borrower’s failure to make installment payments by the due date.
Adjustable rate mortgage--Mortgage agreement by which the lender may make changes in the interest rate at specific intervals. The borrower’s monthly payments on an ARM loan will rise and fall based on the lender’s adjustments.
Annual percentage rate--Measure of the cost of credit (effective interest rate) as required by truth-in-lending laws. The APR includes the stated interest rate and other charges.
Arbitration--Nonjudicial settlement of a dispute by a third party.
Arrears--Being delinquent in paying a debt.
Assumption of mortgage--Assuming liability for payment of a mortgage.
Balloon mortgage--Mortgage that is not fully amortized and requires a large, lump sum (balloon) payment at maturity.
Boilerplate--Standard language in deeds of trust, promissory notes or contracts.
Capital gains--Gain from sale of an asset of a permanent nature used in the production of income. Includes land, buildings and equipment, mineral deposits, timber reserves, patents and many other items. Excludes cash, inventory, merchandise held for sale, receivables and certain intangibles.
Community property--Law in some states--including California--that decrees assets and income acquired by a couple during their marriage are jointly owned by them.
Conventional loan--Mortgage loan, made by a private institution, that is not government insured or guaranteed.
Deed of trust--Legal document used in some states by which title to real estate is conveyed to a third party, who holds title until the owner of the property has repaid the debt. Accomplishes essentially the same purpose as a mortgage.
Down payment--Amount of cash paid by buyer at time of purchase.
Due-on-sale clause--Clause in a loan agreement that the loan is due in its entirety upon sale or transfer of the secured property. Also called alienation clause.
Earnest money--Money or something of value given by a prospective buyer of real property as evidence of good faith.
Equity--Ownership interest in property over and above any liability.
Exclusion rule--Federal tax-law rule that permits anyone aged 55 or older a once-in-a-lifetime exclusion from tax of up to $125,000 in capital gains from sale of a principal residence.
First mortgage--Mortgage that has priority over all other claims against the property except taxes and bonded indebtedness.
Fixed-rate mortgage--Mortgage loan made at a predetermined rate of interest that does not change over the life of the loan agreement.
Foreclosure--Proceeding in or out of court to extinguish an owner’s rights, title or interest in a property in order to sell the property to satisfy a lien against it.
Graduated payment mortgage loan--A home-mortgage loan on which the monthly payments start at a relatively low level and gradually rise at a predetermined rate on the assumption that the homeowner’s income will increase over time.
Home-improvement loan--A loan to finance the repair, modernization or improvement of residential real estate.
Insured loan--Loans insured by either a government agency or a private mortgage-insurance company.
Land contract--Conveyance by which the buyer takes possession of the land but the seller retains title until the buyer completes installment payments for the purchase of the property.
Loan assumption--Process by which a buyer purchases real estate by assuming an existing mortgage and agreeing to personally repay the debt.
Loan commitment--Written agreement by a lender to lend a certain amount of money at a specified rate of interest for a certain period of time.
Mechanic’s lien--Lien given as security for payment of labor and materials.
Mortgage--An instrument that pledges real estate as security for a loan.
Mortgagee--One who lends money and receives a mortgage as security.
Mortgagor--One who pledges property as security for a debt; the borrower.
Origination fee--Fee charged by the lender to cover expenses incurred in making a new loan, such as credit evaluations, title checks and property valuations.
Point--Fee charged by the lender. One point is equal to 1% of the total loan amount.
Prepayment penalty--Fee charged to a borrower for paying off a loan prior to the originally scheduled due date.
Private mortgage insurance--Insurance offered by a private company that protects a lender against part or all of its loss if the borrower defaults on a loan. Although the PMI protects the lender, the borrower must usually pay the premiums for it.
Second mortgage--Junior mortgage that usually is for a smaller amount than, and is subordinated to, the first mortgage.
Secondary financing--Loan secured by a second mortgage or trust deed on real property.
Sweat equity--Equity created in a property by labor performed by the purchaser. Usually increases the value of the property.
Swing loan--Short-term loan used to finance the purchase of a new property.
Trust deed--See “Deed of Trust.”
Veterans Administration--Government agency that guarantees home-loans made by private lenders to qualified veterans, thus allowing for more favorable terms.
Next week: Closing terms. Reprinted from “Real Estate Glossary” by Kenneth Leventhal & Co.